Australia’s housing market is undergoing a significant shift.
First home buyers are flocking back to the market, especially in New South Wales and Victoria, encouraged by stamp duty discounts introduced by their respective state governments to help improve affordability in what are Australia’s most expensive housing markets.
At the same time investors — both from home and overseas — have been retreating to the sidelines, impacted by higher charges, tighter lending standards and capital controls introduced in China, Australia’s largest source of foreign housing demand, in early 2016.
To some, this shift is welcome, not only helping to reduce the hurdle for home ownership for prospective first time buyers but also reducing building financial stability risks due to continued growth in interest-only mortgage lending, indicating that speculative forces were building in the housing market.
However, not everyone is convinced that encouraging first home buyers with stamp duty discounts is a good idea, especially with median property prices in Sydney and Melbourne near doubling from the depths of the GFC.
“The most concerning thing for any potential first home buyer in the current New South Wales and Victoria markets should be the lure of entering a market which has been growing rapidly for many years,” says Cameron Kusher, Research Analyst at CoreLogic, adding “recent data for Sydney and Melbourne indicates that values are now declining”.
From their recent cyclical peaks, median prices in Sydney have fallen 3.1%, and by 0.4% in Melbourne.
While tiny in comparison to the gains see in both cities over the past decade, Kusher points out that with interest rates already sitting at record lows and the RBA indicating that the next move will likely be higher, first home buyers are buying at a time when prices have surged, supply is strong and interest rates look set to rise.
“Although the cash rate is expected to be on hold until early 2019, the combination of already falling dwelling values and potentially higher mortgage rates in the medium-term, these factors should raise some alarm bells for potential buyers,” he says.
“Ideally you do not want to be buying into a market which has only recently entered a downturn.”
Instead of basing the investment decision purely off discounted stamp duty rates, Kusher says it may be better for some marginal first time buyers to remain on the sidelines given the current environment for houses.
“With values declining and investor demand continuing to trend lower a better option may be to remain on the sidelines somewhat longer as values potentially continue to slide,” he says.
“By doing this you potentially avoid going into negative equity immediately, you potentially buy at a lower price and you have time to save an even larger deposit for your mortgage.”
While some first time buyers are clearly taking this opportunity to enter the housing market, if prices continue to fall in the period ahead, any benefit from discounted stamp duty rates could easily be offset, or even overshadowed, by potential capital losses.
There’s no guarantee that prices will fall for an extended period, but Kusher’s warning does provide some food for thought given the current set of circumstances.